Sunday, March 8, 2009

How to make money in the stock market?

The safest way to double your money is to fold it and put it in your pocket.

Being an accountant, the most frequent request I face is advice on making money in the stock market. I am sure they must be out of their mind to actually know my 'financial situation' and still ask for my advice on 'making money'.

Hence, I have decided to write this post so that people can follow this advice, become millionaires, pay me royalty and thereby make me a billionaire. I assure you that this blog will change your life forever, particularly considering the current market conditions. By the way, do you know why advice is always so cheap? Because supply exceeds demand manifold.

The most successful investment manager was Noah: He 'floated stock', while everything around him went into 'liquidation'. While the most unsuccessful one was King Midas. He sold all his 'gold' and invested in stocks.

One sure way of making money is to forget who you borrowed it from, but I wouldn’t advice that if you are not willing to relocate often. For others, here are my ten commandments on how to make money in stock markets:

1. You need to understand the market. Understand the different instruments in the market, like the stock, which is a magical piece of paper that is worth Rs.250 until the moment you buy it and will be worth Rs.50 after you buy it, or the bond, which is what you had with your spouse until you pawned her jewellery to invest in stocks. Then there are the ‘gilt-edged negotiable blondes’, which I will not discuss here as this is a family blog.

There are two types of market. Bull Market is a random market movement causing an investor to mistake himself for a financial genius. Bear Market is a 6 to 18 month period when the kids get no allowance, the wife gets no jewellery and the husband gets no sex. If you are ignorant of these, then the next time you put your money in the market, you will neither be a bull or a bear, but an ass.

2. Understand the actions of others. Successful investing is nothing but anticipating the anticipations of others. Don’t put yourself in a situation where you justify a short-term investment gone wrong as a long-term investment. They say that the best way to make a million in the current turbulent markets is to start with two!

3. Spend at least as much time researching a stock as you would while choosing a camera or a television. If you hear that everybody is buying a certain stock, ask who is selling. The amazing thing about the stock market is that every time somebody sells, another one buys, and they both think they're smart!

4. Get your timing right. A study of markets reveals that the best time to buy anything is yesterday. There are basically two methods of investing based on timing - momentum investing, the fine art of buying high and selling low, and value investing, the art of buying low and selling lower.

October is one of the peculiarly dangerous months to speculate in stocks. The others are: July, January, September, April, November, May, March, June, December, August and February. In fact, your best investments are the ones you did not make.

5. Diversify. Don’t put all your eggs in one basket, but while putting in different baskets, you still need to take care that you don’t break them. Remember, they are still eggs!

By diversifying, I managed to double my interest income from term deposits. I put half my money in one bank at 5% and the other half in another bank at another 5% and thereby earned 10%!

6. Cut your losses. If investments are keeping you awake at night, sell down to the 'sleeping point'! Don’t put yourself in a situation like my friend who sleeps like a baby every night ever since the markets are bad. He wakes up every hour and cries.

7. Get the help of a stockbroker. A stockbroker is a man who is always ready, willing, and able to lay down your money for his commission. It is quite strange that the person who invests your money is called a ‘broker’. It is only a matter of time when the broker ensures that all your disposable income gets disposed off. The joke ‘it was so cold today that I saw a lawyer with his hands in his own pockets’ is more applicable to a stockbroker. The only thing more dangerous than a stockbroker is an amateur stockbroker. And the only thing more dangerous than an amateur stockbroker is a professional stockbroker!

In fact, a stockbroker friend of mine down at Wall Street confided his unwritten philosophy: A man is a client until proven broke. He used to have a corner on the market. Now he has a market on the corner. I doubt if he took to stockbrokerage when he realized that he doesn't have the charisma to succeed as an undertaker.

It is called a bull and bear market for nothing; your stockbroker will feed you all the bull you can bear. Actually, my stockbroker and I are working on a retirement plan. The only problem is that it is his! I have a doubt whether my broker was a fisherman, because every time he hangs up the phone, he laughs, rubs his hands together and says 'I just caught another fish'.

8. Heed to market forecasts. People who criticize weather forecasts have not followed market forecasts closely. Technical analysis is the art of drawing a crooked line from an unproven assumption to a foregone conclusion. A stock market analyst is like a cross-eyed javelin thrower: He doesn't win many contests for accuracy, but he keeps the crowd's attention.

There are a couple of laws of market analysis that one should be aware of. The first law is that for every market analysis, there exists an equal and opposite analysis. The second law is that they are both wrong!

9. Hire a good financial planner if you can afford one. Financial Planner is a guy who will tell you, “I've reviewed your financial picture, and if we manage your money properly, there should be plenty for both of us.” He will tell you tomorrow exactly why the things he predicted yesterday didn't happen today. There are two types of financial planners; those who don't know, and those who don't know they don't know!

10. I have saved the best tip for the last. This is the most foolproof advice which will definitely make you a millionaire. Buy into a stock as per your investment appetite. If it goes up, sell it. If it doesn't, don’t buy it.

By the way, you can send those royalty dollars either through check or direct deposit.